Industry Voice: Investing in ESG leaders with a stewardship lens

The value of strong corporate stewardship is gaining wider recognition across the investment industry. When companies are led by an engaged board and a strong management team, allocate capital wisely for the long term and act in the best interest of all stakeholders, they  have greater potential to'reinforce their competitive advantage and enhance returns over time. 

Asset owners are increasingly drawn to investment strategies that combine responsible investing and competitive long-term returns. Stewardship grows in importance as you extend your time horizon. A long investment horizon and a high bar for inclusion result in a low turnover strategy that drives returns from investing in companies that incorporate ESG risks and opportunities into their business strategy to build long-term advantage in the pursuit of profit. But how do good corporate stewards create value over time and what constitutes effective stewardship investing?

What makes a good steward?

For us, good corporate stewardship means balancing the needs of all stakeholders in the pursuit of profit: investing in people, protecting the planet and investing in the resilience of future profits through innovation. A good steward will identify and mitigate material ESG risks and invest in material ESG opportunities in order to lower its earnings volatility, reduce its cost of capital and bolster its long-term return potential. Companies that consider their impact on the planet will prioritise the transition to greener sources of energy and reduce their environmental footprint (the "E" in ESG), driving more sustainable access to raw materials and reducing their risks from regulation. Companies that care about their employees, customers, supply chain and communities (the "S") are more likely to reduce employee turnover, build customer loyalty, ensure more sustainable supply chains and promote broader perspective and challenge through greater diversity, equity and inclusion in their corporate culture. A robust governance structure (the "G"), improves a company's ability to allocate capital wisely and operate with a long-term view to achieve more sustainable returns on capital. Good stewards invest in innovation to adapt and grow their business over time and strengthen their competitive advantage and pricing power by creating a "moat" that makes it harder for others to enter the market or compete.

A company that reinforces its returns through ongoing investment in its stakeholders has the potential to move from delivering a high return on investment over one or two years to achieving high returns year in and year out. Companies that can sustain attractive returns on capital in this way can, in our view, enhance their stock prices and lower their cost of capital over time. In turn, we believe high, stable returns allow these companies to increase their focus on good stewardship. This virtuous circle, or "flywheel" effect, sustains and improves financial returns and stewardship over time.

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